By John Kemp
LONDON, March 6 Unless prices for natural gas
and crude start to converge soon in the United States, the
overwhelming incentive to switch to dual fuel engines which use
a mix of diesel and natural gas will be overwhelming
It will oust oil-based fuels from a huge range of
applications, ranging from trains, ships and trucks to
If all railroad, marine and industrial engines were switched
to dual fuel and ran on maximum natural gas the potential
reduction in diesel demand would be enormous.
U.S. homes and businesses consumed 3.7 million barrels per
day of distillate fuel oil for heating and running engines in
2011, according to the Energy Information Administration (EIA).
Railroads accounted for 204,000 barrels per day, with marine
bunkers adding another 139,000.
The big prize is the market for highway vehicles, which
consumed 2.4 million barrels a day. Some of that is used in cars
and light trucks, which are not suitable for conversion. But a
big chunk was used in heavy trucks, as well as refuse
collection, municipal buses, and mail delivery services, all of
which rely on central refuelling facilities and could be
retrofitted to use dual fuel without much difficulty.
The diesel market is fast approaching a tipping point. So
far the hassle of retrofitting engines and installing all the
infrastructure needed to distribute liquefied natural gas (LNG)
and compressed natural gas (CNG) has encouraged most businesses
to stick with diesel even though gas has been cheaper.
But if enough businesses convert, and enough distribution
infrastructure is built, conversion costs will likely fall, and
competitive pressure will force others to follow suit.
MAJOR CONVERSION PLANS
It is easy to dismiss this scenario as far-fetched, but it
is already starting to happen.
According to the Wall Street Journal (WSJ), Burlington
Northern-Santa Fe (BNSF) railroad, the second-largest diesel
consumer in the United States after the navy, plans to test
using liquefied natural gas (LNG) to power some trains this
year, and could eventually retrofit its entire fleet of 6,900
locomotives to run on a mix of gas and diesel ("Berkshire's BNSF
railway to test switch to natural gas" March 6).
Reuters reported on Tuesday that ports in northern Europe
are installing refuelling infrastructure to enable vessels to
run on LNG. Twenty vessels are already running on gas, mostly in
Scandinavia, but many more are already on order.
An international working group is already developing
guidelines for safe procedures for LNG bunkering and includes
some of the world's largest container ports and bulk terminals:
Antwerp, Amsterdam, Bremerhaven, Hamburg, Los Angeles, Long
Beach and Rotterdam.
Halliburton, one of the world's largest oilfield service
companies, has started to convert some of its hydraulic pressure
pumping units, used to fracture shale, to run on a gas/diesel
mix, as part of its "frac of the future" cost reduction
programme. And dual fuel engines are also being deployed widely
in offshore oil and gas production.
Shell announced on Tuesday it would build two small-scale
liquefaction plants in Louisiana and Ontario to "form the basis
of two new LNG transport corridors in the Great Lakes and Gulf
Coast regions." The company is also working to use more natural
gas to fuel its own operations.
The technology to modify a conventional diesel engine to run
on a mix of diesel and natural gas has been around for decades.
BNSF considered using gas-powered locomotives in the late
1980s, according to the WSJ.
Leading engine makers General Electric, Caterpillar and
Wartsila all offer a variety of dual-fuel models that can run on
an mix of up to 90 percent natural gas and 10 percent diesel.
In 1998, the California Energy Commission and the U.S.
Department of Energy and the Southern California Gas Company
helped the City of Lompoc to retrofit four municipal buses with
dual fuel gas engines from Caterpillar, using compressed natural
gas (CNG), and study how their performance over a 12 month
period ("Demonstration of Caterpillar C-10 Dual Fuel Engines in
MCI 102DL3 Commuter Buses" Jan 2000).
Most dual fuel engines rely on diesel to start up and
continue to use a small amount to provide ignition (the ignition
temperature of natural gas is too high to be used on its own).
But once the engine is running, natural gas can provide as much
as 50-90 percent of the fuel used with no loss of performance.
The engine can also revert to using 100 percent diesel if gas is
RUNNING VERSUS CAPITAL COSTS
Retrofitting diesel engines so they can run on dual fuel is
expensive but not prohibitively so. In the City of Lompoc case
study, it cost $45,000 to retrofit each municipal bus. The WSJ
reports that retrofitting a diesel locomotive and adding a
tanker carry to carry the LNG could add up to $1 million to the
normal $2 million price tag of a locomotive for BNSF.
For retrofitting to make sense, the difference between gas
and diesel prices must be large enough to allow the operator to
recover the upfront capital costs of retrofitting quickly to
make it worthwhile and minimise the financial risk.
But the shale revolution has resulted in a big and
persistent disconnect between gas and diesel prices. Since the
wedge is expected to last, the financial incentives for
retrofitting are enormous.
Gas is currently priced at around $3.60 per million British
thermal units (mmBtu) in the futures markets. By contrast, a
gallon of diesel costs almost as much ($3.00) for just
one-seventh of the same energy (137,190 Btu). If natural gas and
diesel were priced at energy parity, gas should be trading at
$21 per mmBtu, or diesel should cost just 49 cents per gallon.
These are wholesale prices and do not include the cost of
distribution. Nor do they include the cost of chilling,
pressurising and liquefying the natural gas so it can be used in
CNG and LNG engines. Even so they provide an indication of the
huge price advantage.
The savings on operating costs are so large that the payback
period for most retrofitting projects is just 1-2 years, which
substantially reduces the risk of making the capital investment.
Moreover, once dual fuel engines have been installed, the
owner has complete flexibility over how to operate them. If gas
prices rise again, or the cost of diesel falls, engines can
revert to running on diesel.
SCOPE FOR SUBSTITUTION
Potential for substitution is greatest in North America,
where oil and gas prices have diverged most sharply following
the shale revolution. In regions like Asia where gas prices are
partially or wholly linked to oil, the price advantage is
But Japan has already begun to push for revisions in its LNG
contracts to reflect cheaper prices in the United States and
elsewhere. And China also appears to be eyeing the potential for
rising domestic natural gas production to replace diesel in some
transport and industrial engines.
The fuel industry displays enormous amounts of institutional
inertia. But for the same reason, it can display abrupt
discontinuities when the pressure for change passes as critical
In the 1860s, British economist William Stanley Jevons was
confident oil could never replace coal as a transport fuel.
Winston Churchill's decision to shift the Royal Navy's
battleships to oil on the eve of World War One was seen by
contemporaries as either daring or foolish. Within just over two
generations, however, coal's place as a transport fuel had
If gas and oil prices remain disconnected, straight diesel
engines without dual fuel capability might one day seem as
antiquated as coal-powered warships.
The more likely outcome is that the growing threat to
diesel's market share will force re-convergence between oil and
gas prices, as soaring demand for gas pushes prices higher, and
falling demand for crude pulls prices back.